TMI Blog2018 (4) TMI 502X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) qua this issue. Interest received from AE - There is no dispute that the assessee has advanced a loan in foreign currency to its AE and charged interest @ 10%. We find that the issue of charging interest from AE in respect of the money advanced in foreign currency, the arm’s length interest is to be considered by taking the LIBOR instead of PLR - the associate enterprise (AE) had utilized the loan in its stock and debtors, which was apparent from the balance sheet of the associate enterprise (AE). The assessee had not incurred any brokerage or processing fees in advancing the loan to the associate enterprise (AE). Appellant company had not given any loan or advances to Data Foods (P) Limited., Sri Lanka during the financial year 2006-07. Accordingly the adjustment made on account of loan given to M/S Data Houseware (P) Ltd., U.K. was not justified. Further the appellant was a secured creditor as it had sold goods to the concerned AE also. The position of the appellant company was that of a unpaid seller since the AE owed to it an amount comprising of loan as well as amount for goods purchased. Therefore the TPO had erroneously held that the position of the appellant was tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover in comparison to 4.96% for the assessment year 2006-07 and 4.37% for the assessment year 2005-06. Further, the addition made by the AO in this respect for the assessment year 2005-06 was deleted by the Tribunal in assessee’s own case. The factual details given by ld. CIT (A) have not been controverted before us. Disallowance made on foreign travel expenses - Held that:- Disallowance made by the AO was deleted by the ld. CIT (A) by accepting the explanation of the assessee that the foreign tour of Managing Director was not personal but was for attending the conference of International Association of Seed Crushers in London. There is no quarrel on the point that if the foreign tour was undertaken by the MD to attend the alleged conference then the same will be considered as an expenditure incurred for the purpose of business of the assessee. However, the assessee has not produced the details of the timing of the foreign tour undertaken by the MD and specific date of the journey as well as the timing of the conference of International Association of Seed Crushers as claimed by the assessee. Therefore, if the foreign visit of the MD is matching with the conference date then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance to ₹ 74,132/- out of total addition of ₹ 2,50,312/- on a/c of misc. expenses. 3. That the ld. Commissioner of Income-tax (A) has erred in law as well as on the facts and circumstances of the case in deleting the addition/disallowance of ₹ 1,00,000/- on a/c of printing and stationery expenses. 4. That the ld. Commissioner of Income-tax (A) has erred in law as well as on the facts and circumstances of the case in restricting the addition/disallowance to ₹ 47,952/- out of total addition of ₹ 1,00,000/- on a/c of repair and maintenance expenses. 5. That the ld. Commissioner of Income-tax (A) has erred in law as on the facts and circumstances of the case in deleting the addition/disallowance of ₹ 2,50,000/- on a/c of consumable stores and chemical expenses. 6. That the ld. Commissioner of Income-tax (A) has erred in law as well as on the facts and circumstances of the case in deleting the addition/disallowance of ₹ 20,000/- on a/c of packing material expenses. 7. That the ld. Commissioner of Income-tax (A) has erred in law as well as on the facts and circumstances of the case in deleting the addition/dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a RPM Rs.18,42,23,773/- 2 Sale of Ceramic (Crockery) items Data Housewares UK Profit Split ₹ 3,48,81,897/- 3 Interest received @ 9% p.a. on GBP 65,000/- lent in January 2007 Date Housewares UK CUP GBP 1335.62 (Rs. 1.12 lac) Out of these three international transactions entered into by the assessee with its associated enterprises, the TPO accepted sale of ceramic (crockery) items at arm s length. The TPO has taken up exercising of determining the arm s length price in respect of other two transactions which we will deal with one by one as under : Purchase of bakery shortening for trading 3. The assessee has purchased bakery shortening from its associated enterprises, namely, Data Foods, Sri Lanka of ₹ 18,42,23,773/-. To benchmark its international transaction, the assessee applied Resale Price Method (RPM) as most appropriate method (MAM) and claimed that its international transaction is at arm s length. The TPO did not accept the TP analysis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mean of 11 4.07% Accordingly the TPO proposed an adjustment under section 92CA(3) of ₹ 2,00,63,046/-. On appeal, the ld. CIT (A) has deleted the adjustment on account of transfer pricing by accepting the transaction of the assessee in respect of purchases of bakery shortening from its AE. The ld. CIT (A) has also considered the margin of the assessee and the Mean margin as computed by the TPO and found that no adjustment is called for as the difference is less than the tolerance range as per second proviso to section 92C(2) of the Act. 3.1. We have heard the ld. D/R as well as the ld. A/R and considered the relevant material on record. The ld. D/R has submitted that the assessee has applied Resale Price Method (RPM) as most appropriate method whereas it is not the case of the assessee being a distributor or agent. The Resale Price Method is not applicable in the case of the assessee and, therefore, the AO is justified in applying the TNMM method as most appropriate for determination of arm s length price. He has further contended that the assessee has not brought on record any comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. The assessee has benchmarked its international transaction by applying comparable uncontrolled price (CUP) as a most appropriate method for determination of arm s length interest from AE. The TPO applied 13% as arm s length interest to be charged from AE and accordingly made an addition/adjustment of ₹ 2,02,800/- on this account. On appeal, the ld. CIT (A) has deleted the adjustment made by the TPO/AO. 6. We have heard the ld. D/R as well as the ld. A/R and considered the relevant material on record. There is no dispute that the assessee has advanced a loan in foreign currency to its AE and charged interest @ 10%. We find that the issue of charging interest from AE in respect of the money advanced in foreign currency, the arm s length interest is to be considered by taking the LIBOR instead of PLR. The ld. CIT (A) has considered this issue in para 4.1 as under :- 4.1 I have duly considered the submissions of the appellant. The appellant had advanced the loan to associate enterprise (AE) namely M/s Data Houseware (P) Limited UK @ 10%. However the TPO had erroneously held that it was advanced at the rate of 8%. The provisions of section 92 of the Income-Tax Act wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile proposing to apply the arm s length price @ 14% the TPO had considered the domestic transactions. So the interest rate that would have been charged in similar circumstances or the interest rate that the tax payer could have got by lending such money to private persons in India or interest rate the company could have got from independent third part in India by lending such surplus money under comparable circumstances i.e. without any security and margin money was under comparable circumstances i.e. without any security and margin money was considered by the TPO. It was held by TPO that rate of interest of 14% would be the arm s length price and it was accordingly applied. However the above basis and ground were against the explicit provisions of Rule 3 of the Income Tax rules. The transaction involved in the case was an international transaction whereas the TPO had referred to the circumstances of domestic transaction, therefore the same could not be applied under the given circumstances. The assessee company had lent the money to associate enterprise (AE) which was located in UK, therefore the rate of interest obtained in the UK had to be considered for the purpose of comparing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ka during the financial year 2006-07. Accordingly the adjustment made on account of loan given to M/S Data Houseware (P) Ltd., U.K. was not justified. Further the appellant was a secured creditor as it had sold goods to the concerned AE also. The position of the appellant company was that of a unpaid seller since the AE owed to it an amount comprising of loan as well as amount for goods purchased. Therefore the TPO had erroneously held that the position of the appellant was that of a unsecured creditor/loanee. I accordingly direct the AO to delete the addition of ₹ 2,55,929/-made on account of adjustments made by the TPO. This ground of appeal is allowed. Thus it is clear that the ld. CIT (A) has followed the decision of this Tribunal on this issue and accordingly we do not find any error or illegality in the order of ld. CIT (A) qua this issue. 7. Ground No. 2 is regarding disallowance made by the AO on account of Miscellaneous Expenses of ₹ 2,50,312/- which was restricted by the ld. CIT (A) to ₹ 74,132/-. 7.1. The AO noted that assessee has debited a sum of ₹ 25,03,119/- under the head Miscellaneous Expenses. The AO asked the assessee to furnis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets to employees and customers and FBT had been paid on the portion relating to employees. It is evident that the AO was under erroneous belief that the entire amount had been incurred on the customers. Moreover it also included licence and inspection fees of ₹ 2,28,680/-, subscription fees of ₹ 1,32,110/-, electricity charges of ₹ 92,190/-, annual listing fees of ₹ 14,590/- and books and periodicals. Further these expenses were fully vouched and the AO had not cited any specific instance where the expenditure was unvouched. On going through the ledger account, it is seen that out of total expenses of ₹ 25,03,119/-, an amount of ₹ 7,41,322/- had been paid in cash and remaining amount of ₹ 17,61,797/- had been paid through account payee cheques. In view of the above facts, the disallowance of ₹ 2,50,312/- made by the AO was on the higher side. It is an undisputed fact that small time vendors do not issue proper bills/memos and in such cases, the payments are made through internal vouchers. The appellant cannot be penalized so heavily for such a failure. Considering the facts of the present case, I am of the opinion that disallowance to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appellant company. The appellant had maintained complete bills/supporting for the printing stationery expenses of ₹ 8,99,252/-. The expenditure was incurred out of business expediency and the AO had failed to point out any discrepancy in the vouchers maintained by the appellant. The disallowance had been made in a routine manner and was therefore not sustainable. I therefore direct the AO to delete the addition of ₹ 1,00,000/- on account of printing stationery expenses made by her. This ground of appeal is allowed. The ld. CIT (A) has deleted the disallowance by considering the fact that the assessee has maintained complete bills/supporting vouchers for the expenditure incurred on account of printing and stationary. Further, the expenditure was incurred out of business expediency and in the absence of any discrepancy in the vouchers maintained by the assessee, the disallowance is uncalled for. We do not find any error or illegality in the order of ld. CIT (A) in deleting the disallowance made by the AO. 10. Ground No. 4 is regarding disallowance made of ₹ 1,00,000/- on account of repair and maintenance expenses which was restricted to ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf made vouchers are produced by the assessee, then the disallowance made by ld. CIT (A) restricting the expenditure incurred in cash is just and proper. Hence we do not find any reason to interfere with the finding of the ld. CIT (A) on this issue. Ground no. 4 of the revenue s appeal and ground no. 1 of the cross objection are dismissed. 12. Ground No. 5 of the revenue s appeal is regarding an addition/disallowance made by the AO on account of consumable stores and chemical expenses which was deleted by ld. CIT (A). 13. The AO noted that certain vouchers for which no supporting bills were available in respect of the expenditure incurred on chemicals and consumable stores. Thus due to the improper vouchers/ self made vouchers, the AO has made an adhoc disallowance of ₹ 2,50,000/- out of the total expenditure of ₹ 4,09,18,214/-. On appeal, the ld. CIT (A) has deleted the disallowance made by the AO in para 5.4 as under :- 5.4 On going through the ledger account of chemical consumable stores expenses, it is seen that out of total expenses of ₹ 4,09,18,214/-, a meager amount of ₹ 27,477/- was incurred in cask Whereas the AO had made the disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of my predecessor and Hon ble ITAT, Jaipur, in the earlier years. Therefore, the disallowance of ₹ 20,000/- is deleted in this year also by following the order of ITAT, Jaipur for the assessment year 2004-05 in order No. 386/JP/2011 dated 14.10.2011 wherein the similar disallowance was deleted. This ground of appeal is allowed. Thus it is clear that this issue is covered by the decision of this Tribunal in assessee s own case for the assessment year 2004-05. Hence we do not find any merit or substance in this ground of the revenue s appeal. Accordingly the same is dismissed. 17. Ground No. 7 is regarding the disallowance made by the AO on account of packing material expenses which was deleted by the ld. CIT (A). 18. The AO noted that the assessee has claimed packing material expenses of ₹ 20,04,10,136/-. However, the assessee has produced purchase vouchers in most of the cases but for small amount the corresponding bills were not available. The AO further observed that the quantitative record for each type of packing material for each class of goods have not been maintained separately. Thus in the absence of separate record for each type of packing material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance. In view of the lack of proper appreciation of the facts and lack of investigation and proper reasoning, the disallowance was deleted. In the present case also, it is clear that the AO had made the impugned disallowance on conjectures and surmises. The addition made by the AO has no legs to stand and same is accordingly deleted. This ground of appeal is allowed. Thus the ld. CIT (A) has taken note of the fact that the expenditure for the year under consideration is at 4.32% of the turnover in comparison to 4.96% for the assessment year 2006-07 and 4.37% for the assessment year 2005-06. Further, the addition made by the AO in this respect for the assessment year 2005-06 was deleted by the Tribunal in assessee s own case. The factual details given by ld. CIT (A) have not been controverted before us. Accordingly, we do not find any error or illegality in the order of ld. CIT (A) qua this issue. 20. Ground No. 8 is regarding disallowance made on foreign travel expenses deleted by ld. CIT (A). 21. The AO noted that the traveling expenses incurred by the assessee are in respect of the foreign tour of Shri V.K. Dutta, Managing Director of the assessee company amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign tour undertaken by the MD and specific date of the journey as well as the timing of the conference of International Association of Seed Crushers as claimed by the assessee. Therefore, if the foreign visit of the MD is matching with the conference date then the claim of the assessee cannot be doubted. Hence we direct the AO to verify this fact and then consider this issue in the light of above observation. 23. Ground No. 9 is regarding disallowance made under section 14 read with rule 8D which was deleted by ld. CIT (A). 24. The AO noted that the assessee has earned exempted dividend income of ₹ 2,16,045/-. Accordingly, the AO invoked the provisions of section 14A and made the disallowance as per the formula provided under rule 8D of the IT Rules. On appeal, the ld. CIT (A) deleted the disallowance made by the AO. 25. We have heard the ld. D/R as well as the ld. A/R and considered the relevant material on record. There is no dispute that rule 8D is not applicable for the year under consideration as it is applicable for the assessment year 2008-09 as held by the Hon ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. vs. DCIT 328 ITR 81 (Bombay) as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble Supreme Court in the case of CIT Vs Walfort Shares Stock Brokers Pvt Ltd (326 ITR 1) that for attracting section 14A, there has to be a proximate cause for disallowance which is its relationship with the tax exempt income. The Hon'ble Punjab Haryana High Court in the case of CIT Vs Hero Cycles Ltd (323 ITR 518) held that merely because the assessee had incurred interest expenditure on borrowed funds, it would not ipso facto invite the disallowance U/s 14A unless there was evidence to show that such interest bearing funds had been invested in shares which had generated dividend income. Hence disallowance U/s 14A was not sustainable. In the present case, the interest expenses were incurred on working capital limits and term loans taken from SBBJ against hypothecation of stock, debtors and plant and machinery. The total working capital loan and unsecured loans outstanding as on 31.03.2007 were of ₹ 5266.48 lakhs as against that the investment in stock and debtors was at ₹ 10299.84 lakhs. Thus the entire loan was utilized for the purpose of business. The investments were made in shares in the earlier years out of reserve surplus and out of interest free funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... servations of the Hon ble ITAT on page 41 are reproduced as under: After going through the order of the Tribunal and submission of both the parties, we find that facts and circumstances of the transactions are identical to the case of M/s Deepak Vegpro Pvt. Ltd. (supra). In case of M/s Deepak Vegpro Pvt. Ltd. also the addition was made for assessment year 2006-07. In case of M/s Deepak Vegpro Pvt. Ltd. we have already held that the transactions are business in nature. Therefore a finding has already been given for the year under consideration as in that case also the addition was made on account of transaction with the assessee ie. M/s Vijay Solvex Pvt. Ltd. and other company M/s Saurabh Agrotech. Various case laws relied upon by ld counsel have already been considered by us while deciding the appeal in case of M/s Deepak Vegpro Pvt. Ltd. The cases on which reliance has been placed by ld DR are distinguishable as these transactions are not of loan transaction and, therefore, they are not applicable on the facts of the present case. We have already held that transactions are of business in nature, therefore, provisions of section 2(22)(e) cannot be applied. In view of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial transactions held to be not covered under Section 2(22)(e) of the Act are as follows : i. Advances were made by a company to a sister concern and adjusted against the dues for job work done by the sister concern. It was held that amounts advanced for business transactions do not fall within the definition of deemed dividend under Section 2(22)(e) of the Act. (CIT vs. Creative Dyeing Printing Pvt. Ltd., Delhi High Court). ii. Advance was made by a company to its shareholder to install plant and machinery at the shareholder s premises to enable him to do job work for the company so that the company could fulfill an export order. It was held that as the assessee proved business expediency, the advance was not covered by section 2(22)(e) of the Act. (CIT vs. Amrik Singh, P H High Court). iii. A floating security deposit was given by a company to its sister concern against the use of electricity generators belonging to the sister concern. The company utilized gas available to it from GAIL to generate electricity and supplied it to the sister concern at concessional rates. It was held that the security deposit made by the company to its sister concern was a bus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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